Demonetisation – Meaning and Features

Demonetisation is defined as an economic policy or the process through which the central government cancels the legal tender status of a currency unit in circulation. After demonetisation, that currency unit cannot be used as money .

Demonetisation in India

Demonetisation was first time introduced in the year 1946 cancelling the legal tender of currency notes of ₹1,000 and ₹10,000 denomination by Reserve Bank of India, followed by the same in 1954,in 1978.

On 8 November 2016, Government of India, on the recommendation of the Central Board of the Reserve Bank, demonetised the currency notes of ₹500 and ₹1,000 except for a few specified purposes such as paying utility bills and introduced fresh notes of denomination ₹2000. This led to eighty six per cent of the money in circulation invalid. Restrictions were also placed on the convertibility of domestic money and bank deposits.

Features Of Demonetisation

As tax administration measure:

People having cash falling under declared income deposited their cash in banks immediately to be exchanged for new notes but those with black money (their unaccounted wealth) had to pay taxes at a penalty rate.

As a shift on the part of the government:

Demonetisation is being considered as a strict measure by the government against tax evasion which will not be tolerated or accepted.

Channelizing savings into the formal financial system:

Though ,much of the cash deposited in the banking system is likely to be withdrawn but some of the new deposits schemes introduced by the banks will be used as loans, at lower interest rates.

Creation of a less-cash or cash-lite economy:

Another feature of demonetization is to help in channeling more savings through the formal financial system and improving tax compliance.

Criticism of Demonetisation

Digital transactions require use of cell phones for customers and Point-of-Sale (PoS) machines for merchants, which will only work if there is internet connectivity.

But the disadvantages are counterbalanced by a view that it helps people into the formal economy, thereby increasing financial saving and reducing tax evasion.

Objectives of Demonetisation in India

Following are the main objectives of demonetisation policy adopted by the Government of India in the year 2016.

To control circulation of fake currency.

To restrict and reduce the supply of money, used for anti-social activities.

To run cashless economy in the country.

To reduce or eliminate tax evasion .

To eliminate black money and black marketing.

To curb corruption.

Impact of Demonetisation

1. Money/Interest rates:

Decline in cash transactions.

Bank deposits increased.

iii. Increase in financial savings.

Private wealth :

Some high demonetised notes were not returned to the depositors leading to fall in the prices of real estate.

Public sector wealth:

There had been no effect on public sector wealth.

Digitisation:

Digital transactions amongst new users (RuPay/AEPS) have increased.

Real estate:

Prices of real estate have declined.

Tax collection:

There has been rise in income tax collection because of increased disclosure.